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From the team at myStockOptions.com and myNQDC.com, this blog has commentaries on equity compensation and NQ deferred comp, tips on the related tax and financial planning, updates about new stuff at our websites, and sometimes the lighter side of the topics we cover. We do our best to keep the writing lively.

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28 November 2016

When holiday decorations and Christmas songs emerge, so does interest in year-end financial and tax planning among those with stock compensation or holdings of company shares. In 2016, year-end planning can be tricky if you weigh the ongoing impact of recent tax-rate changes against expected tax reforms ahead under the new president. To help people with planning at the end of 2016 and the start of 2017, the year-end section at myStockOptions.com provides education and guidance on major issues, decisions, and innovative financial-planning strategies.

Tax Brackets And Rates Affect Year-End Planning For Equity Compensation And Company Shares

Along with the financial- and tax-planning concepts that apply at the close of every year, in 2016 people with equity comp and company shares will want to continue considering the impact of the tax changes that took effect under the American Taxpayer Relief Act and the Affordable Care Act.

Timely year-end guidance is particularly crucial for people who are considering option exercises or stock sales at the end of 2016. Employees with equity grants and company shares should be aware of the 2016 and 2017 thresholds for higher tax rates on compensation income and capital gains, the additional Medicare tax on compensation income, and the Medicare surtax on investment income. They may want to consider keeping their income below those thresholds, if possible. If you are convinced that tax rates will be lower in 2017 and beyond, you may want to defer income into the future and accelerate deductions into 2016.

While keeping these tax rates and thresholds in mind, employees should also consider the prospects for tax reforms ahead under President Donald Trump. In 2017, President Trump will probably propose tax-law changes that are supported by the Republican-controlled Congress. These changes are expected to include:

a simplification of individual income tax rates, including a reduction in the top rate

the repeal of Obamacare and the related Medicare taxes that fund it under the Affordable Care Act

However, caution is warranted. The prospects for tax-rate decreases, and their timing, remain too uncertain to be a controlling factor in decision-making at year-end 2016. Even if you predict that tax rates are likely to change in the future, many experts say that tax rates should never be the only reason for exercising options or selling shares, or waiting to do so, at the end of the year. Instead, make investment objectives and personal financial needs, not tax considerations, the driver of your decisions.

At year-end, multi-year planning is especially valuable with equity compensation. You can control the timing of stock sales and option exercises, and you know when restricted stock/RSUs will vest.

Year-End Content Provides Education And Guidance

At myStockOptions.com, the section Year-End Planning has been fully updated for 2016. Its content includes the following articles and FAQs.

14 November 2016

Objectively, we know that stock compensation is not one of the biggest issues on people's minds as the United States slithers toward the unexpected reality of a Trump presidency. Naturally, however, it is our role to consider how stock compensation and employee ownership will be affected.

How Do Trump And His Supporters View Stock Compensation?

To get a sense of Donald Trump's views on stock comp, the myStockOptions staff did some in-depth research into SEC filings made by him and his companies. In 1995, the board of Trump Hotels & Casino Resorts adopted what it called its 1995 Stock Incentive Plan, which it amended in 1996 to increase the number of authorized shares it could issue (see pages 20–22 of the company's 1996 proxy statement). Trump himself received 500,000 stock options per year between 2000 and 2002 (see the tables, text, and footnotes on pages 16–18 of the company's 2003 proxy statement). Later, when Trump was chairman of the board at Trump Entertainment Resorts, the company adopted a stock plan at its 2005 annual meeting as part of its reorganization, and it canceled its prior plan and all of the grants made under it (see Proposal 3 on page 35–41 and Annex A of the company's 2005 proxy statement). Like other senior executives, Trump had to file Form 4 with the SEC to report his grants under the rules of Section 16 (see, for example, the reporting of his 2002 grant). Therefore, we can assume that Trump is familiar with stock options and restricted stock, though his company's subsequent bankruptcy eliminated the value of its grants.

It doesn't take a degree from Trump University to know that equity awards made broadly to a company's employees, along with employee stock purchase plans and other forms of employee ownership (e.g. ESOPs), are forms of egalitarian capitalism that can spread a company's wealth and reduce income inequality (see our recent blog commentary on this topic). Trump's supporters seem likely to approve of such a populist approach to employee compensation. However, the recent narrowing of stock grant eligibility and the huge equity comp gains made by senior executives have perhaps given stock compensation an elitist image that Trump's blue-collar supporters can be expected to find deplorable.

Republican Tax Reform May Increase The Value Of Stock Compensation

Tax changes are widely expected under Trump's presidency and the incoming Republican-dominated Congress (see a commentary from CCH). The House GOP Tax Reform Blueprint calls for the simplification of individual income tax rates to 12%, 25%, and 33%. How changes in income-tax rates would tie into the flat supplemental rate of withholding on stock compensation is unclear and would need clarification, as the structure of the rate is based on the current seven tax brackets.

Trump's tax plan does not propose to change the capital gains rates (15% and 20%). However, a reduction in the difference between ordinary income rates and the capital gains rates might affect tax-planning decisions, e.g. whether to hold shares at exercise, vesting, or purchase.

Changes may also include the elimination of the alternative minimum tax (AMT). That would be welcome news for anyone receiving grants of incentive stock options (ISOs), as currently the income spread at ISO exercise can trigger the AMT and complicate tax planning.

In addition, Trump vehemently asserted throughout his campaign that he wants to "repeal and replace" Obamacare. Presumably, that would eliminate the additional Medicare taxes used to fund Obamacare under the Affordable Care Act. Those additional taxes are:

The 3.8% surtax on net investment income, such as capital gains and dividends, for single filers with yearly modified adjusted gross income of over $200,000 ($250,000 for married couples filing jointly). The removal of the surtax would increase the appeal of holding shares.

The extra 0.9% Medicare tax owed by the same taxpayers through the withholding on compensation income, such as income from the exercise of nonqualified stock options or the vesting of RSUs.

Given the enormous federal budget deficit, the likely need for 60 votes in the Senate to defeat a filibuster and pass a major tax overhaul, and Trump's inexperience in the art of political compromise, there are no guarantees that these proposals will become law. One possible way to fund them to reduce the impact on the national debt would be to eliminate provisions that are favorable to stock compensation, such as the performance-based exception for limiting the corporate tax deduction under IRC Section 162(m).

Outlook For The Future

In the short term, with little risk of tax increases in 2017, there is no pressing tax-law reason to accelerate income into 2016. Even if you do predict that your tax rates are likely to drop or rise in the future, taxes should never be the only planning consideration for stock options and company stock at year-end. Instead, you may want to let investment objectives and personal financial needs, not tax considerations, drive your year-end planning.

In the long term, your company's stock price, not tax legislation, is likely to be the most crucial factor for your equity compensation. When a stock price falls after grant or becomes excessively volatile, equity grants tend to lose their perceived value (even if stock options do not actually go underwater). Therefore, if stock prices continue to perform well and we avoid the falling prices of a bear market, we can perhaps reasonably expect that stock compensation, ESPPs, and employee ownership will continue to thrive, especially when these opportunities are granted broadly to most or all employees in an egalitarian way. Additionally, the success of stock compensation depends not only on a company's share price but also on the efficacy with which it both communicates its stock plan to employees and provides them with educational resources on their grants.

31 October 2016

November and December are high-traffic times for our sibling website myNQDC.com, a comprehensive resource on nonqualified deferred compensation (NQDC). The last quarter of the year is the most common period during which salary deferrals are elected through NQDC plans for the year ahead. Participants in NQDC plans choosing how much of next year's salary to defer can find plenty of financial-planning guidance at myNQDC.com. See also our FAQ on year-end planning issues, which may shift in upcoming years with a new president and the possibility of tax reform.

As expected, this presidential election year brought no tax changes of significance. Therefore, known tax-rate increases or decreases are not big factors in decisions at year-end 2016. However, after the new president has been elected, the likelihood of major tax reforms in the next few years may affect your long-term decision-making.

Year-End Issues To Consider

In the analysis for choosing deferrals to make in 2017, one ongoing issue stems from the tax increases that took effect in 2013, including the additional Medicare taxes for high earners. Other points to consider include the following.

1. Maximizing the amount you can contribute to your 401(k) plans.You should participate in the NQDC plan only if you can also afford the maximum annual contributions to your qualified deferral plans, as those are fully funded and protected by ERISA.

2. Cash needs for the year ahead and multi-year projections for your income. At a minimum, these considerations will tell you whether you have extra cash to defer. Your cash-flow projections should factor in all sources of income, including equity compensation, against spending needs in the near future to help you decide how much to defer.

3. The financial security of your company, and your job security.If you have concerns about your company's solvency, you may want to avoid contributions to nonqualified plans because of the risks presented by corporate bankruptcy. Any potential for job loss may also make NQDC deferrals unwise. If you lose your job during the deferral period, the income in the plan will be distributed to you immediately, triggering taxes you may not want to pay at that time.

4. Company match. Though company matches are not as common in NQDC plans as they are in 401(k) plans, if a company match requires you to contribute a certain amount to your NQDC plan, you will need to consider deferring at least that minimum.

5. The thresholds for higher taxes and rates.Higher tax rates make deferring income appealing. Consider whether the tax rate at the time of distribution is likely to be lower or higher than it is at the time of deferral. If you think the rate will be lower, then pre-tax deferrals can make sense. Deferrals can keep your income below the current triggers for higher taxes.

To make projections for current and future tax rates, and to compare returns both through deferrals and through not deferring income, try the calculator at myNQDC.com.

Influencing year-end decisions about nonqualified plans are the contribution and benefit limits that apply to qualified retirement plans. These limits are provided under Section 415 of the Internal Revenue Code, and every autumn the IRS announces inflation-adjusted figures for the following year. Importantly, the contribution limits of qualified plans form the major reason for the existence of nonqualified plans: to allow executives and key employees to save additional amounts for retirement with an elective nonqualified plan or an excess 401(k) plan.

What this means: The changes in limits from 2016 to 2017 are slight. If you have already maxed out your qualified plan contributions for 2016, you will probably do the same in 2017, so you will need to rely on NQDC plans to defer any salary and bonus increases you expect in 2017.

The contribution limits for qualified plans are provided under Section 415 of the Internal Revenue Code, and every autumn the IRS announces figures for the following year. The limits are adjusted annually for inflation. While there are slight increases in some limits for 2017, in others the 2016 limits continue. (See the IRS release announcing the figures for 2017.)

Income threshold defining key employees for the purposes of top-heavy plans and the six-month delay on payout upon separation

$170,000

$175,000

Income threshold defining highly compensated employees for the purposes of nondiscrimination testing

$120,000

$120,000

Set by the Social Security Administration, the Social Security wage cap will rise in 2017 to $127,200, a significant increase from $118,500 in 2016. With the 6.2% rate of Social Security tax, the maximum possible Social Security withholding in 2017 is $7,886.40.

For a table comparing the features of 401(k) plans and NQDC plans, and their relative advantages and disadvantages, see an FAQ at myNQDC.com.

24 October 2016

The Social Security Administration (SSA) has announced that the maximum wage amount in the Social Security tax calculation, including supplemental income from stock compensation, will grow from $118,500 in 2016 to $127,200 in 2017. Therefore, at the 6.2% Social Security tax rate, the maximum annual amount that you can owe will increase from $7,347 in 2016 to $7,886.40 in 2017. This is a surprising jump of more than 7%, especially after no change in the wage base from 2015 to 2016. Companies and stock plan administrators must adjust their systems to factor the higher wage base into the Social Security calculation for NQSO exercises, restricted stock/RSU vesting, and purchases of nonqualified ESPP shares.

The increase presents a year-end-planning strategy to consider. When you exercise nonqualified stock options or when restricted stock/RSUs vest, you owe Social Security tax up to this yearly income ceiling (Medicare tax is uncapped). If your yearly income is already over that threshold, you can exercise nonqualified stock options or stock appreciation rights before the end of 2016 without paying Social Security tax, and therefore you can keep an extra 6.2% of the related income. Were you to wait until January, your yearly wage base would start at $0, and Social Security tax would again apply up to the new maximum for that year. If you are already over the wage base for 2016 and expect to be eventually over the wage base for 2017, you can therefore save the $539.40 increase in Social Security tax simply by exercising stock options this year rather than in 2017.

For more year-end-planning strategies, see the articles and FAQs in the year-end section on myStockOptions.com.

Visit Us This Week At The NASPP Annual Conference In Houston!

We are excited to be at the NASPP's annual conference this week in Houston (October 24–27). As always, myStockOptions has its cheerful booth in the exhibit hall, where our editor-in-chief Bruce Brumberg is available as an NASPP-designated expert to answer questions on stock plan education/communications and on equity comp taxation. Bruce is also speaking on Tuesday at a panel in one of the conference sessions: Mind Your Ds & Ts: Death, Divorce, Disability and Terminations, a discussion of proactive measures to help your company, its employees, and their families better prepare for life events related to equity awards, including retirement, disability, death, and divorce. The session will take place on Tuesday, Oct. 25, 12:45–1:45 p.m. If you're attending the conference, please stop by our exhibit booth for a chat and pick up a myStockOptions souvenir!

20 October 2016

We wrote a blog commentary in July about the Empowering Employees Through Stock Ownership Act (HR 5719), which was subsequently approved by the House of Representatives, through a vote of 287 to 124. The bill is now in the Senate for consideration. In short, HR 5719 seeks to give employees in privately held companies extra time to pay taxes on the income they recognize at option exercise or RSU vesting. Instead of paying taxes at the exercise of nonqualified options or at the vesting of stock-settled RSUs, employees would be allowed to elect to defer the resulting income, and thus the taxes on that income, for up to seven years.

A staff member for Congressman Erik Paulsen (R–MN), the bill's leading sponsor in the House, told myStockOptions that "Rep. Paulsen is hopeful that the Senate will pass the legislation soon and that it will make its way to the President's desk sometime in the lame-duck session, either as a standalone bill or as part of a larger package." He added that Rep. Paulsen is not aware of any timetable for Senate consideration. When we checked with the office of Senator Mark Warner (D–VA), a leading sponsor of the bill in the Senate, his staff confirmed that the legislation had just been introduced. With Congress now in recess ahead of the general election on Nov. 8, it is very unlikely that anything will happen with the legislation until after the election. There is a chance that the bill will be adopted during the lame-duck session, a busy time when many laws with populist intentions tend to be hastily enacted while the outgoing president is still in office. At Congress.gov, you can follow the progress of the legislation in the House and the Senate.

Details Of The Proposed Law Could Unintentionally Discourage Its Effectiveness

In general, we support a beneficial tax-law change for equity awards at pre-IPO companies and favor broad-based stock plans. However, in the report on the bill from the House Ways & Means Committee (see pages 10–14, "Explanation of Provision"), we do see some aspects of the legislation that might somewhat dampen enthusiasm for the proposed tax-qualified grants. The tax deferral would not apply to Medicare, Social Security, or state taxes. It would not apply to early-exercise options. As we interpret it, the deferral election apparently would turn ISOs into NQSOs. Furthermore, clarifications are needed on various aspects of the proposed law. For example, the House report states that an "inclusion deferral election" would be required within 30 days of vesting but does not mention that for options the election would need to be 30 days from exercise (not vesting). Also, the numerous rules that companies would have to follow to grant what the bill calls "qualified stock" might make these awards appealing only to large pre-IPO companies and not to true early-stage startups.

Moreover, companies currently already have a way to structure pre-IPO RSU grants so they do not trigger taxes until there is a liquidity event. Without liquidity and the ability to trade their stock, employees who exercise options in pre-IPO companies face the risk of tying up their money in stock that could be worthless. The proposed tax-deferral feature includes a seven-year period before taxes are owed, but for some employees this may not be long enough to encourage them to exercise options and create the widespread employee ownership that the bill wants to promote.

For additional analysis on the bill and the issues it raises, see a commentary from the consulting firm Compensia and an article by columnist Kathleen Pender in the San Francisco Chronicle.

28 September 2016

If corporate stock plan education were a student, it would be getting a B-plus—not bad, but can do better. This is our takeaway from the data in Securities' 2016 E*TRADE Corporate Services Annual Participant Survey, which obtained responses from more than 43,000 people with equity compensation who use the firm as a broker. (Please note that the survey results below are solely owned by E*TRADE Financial Corporation and may not be reproduced or distributed in whole or in part without the written consent of E*TRADE, which is not affiliated with myStockOptions.com. E*TRADE Corporate Services provides equity compensation management solutions, including participant services from E*TRADE Securities.)

Mixed Report Card

In brief, the findings of E*TRADE's survey indicate the following:

Most stock plan participants like their equity compensation and say it enhances their commitment to their companies.

About 40% of the respondents say that stock comp would be a factor in deciding whether to stay in their current job or take a job with a different company.

The survey responses make it clear that participants need well-rounded general financial education, not just communications about the specifics of their grants. Respondents indicated a desire to learn more about basic financial planning, investing, and the role of their equity comp in their overall financial planning.

Many employees are eager to know more about how to make the most of their stock comp, when to take action (e.g. exercise options or sell shares), and the related tax impact. The survey suggests that ESPP participants need the most hand-holding in those areas.

The most popular uses of stock compensation are (1) acquiring company shares for long-term holding and (2) paying big expenses.

It appears that few participants sell shares and then re-invest proceeds in other securities.

A growing number of the employees apparently perceive stock compensation as simply "extra pay, like a bonus."

According to the survey, a whopping 80% of plan participants do not fully understand at least one concept or feature of their stock compensation. The survey data that we present in the table below indicates that maximizing financial benefits and understanding tax impacts are the areas where plan participants need the most educational guidance.

The survey found that email and video are the most popular media for receiving stock plan education and communications, followed closely by written materials that can be downloaded from the company's intranet.

Stock Plan Education Is A Core Company Activity

While stock plan professionals have made huge strides during recent years, stock plan education can always be better—both to help plan participants and to maximize the value of plans for companies, which are depending on them to attract, keep, and motivate valuable employees. The more participants know about their stock compensation, the more likely they are to appreciate it, avoid mistakes, benefit from it, and be loyal to the company. This puts stock plans in a crucial position for corporate vitality and value creation.

The independent, unbiased educational resources of myStockOptions.com can help with stock plan education, including tax impacts and financial planning. Our content is available for licensing by companies to help plan participants learn more about their equity comp. These resources include a growing number of videos and podcasts to complement our articles, FAQs, interactive quizzes, tax guides, glossary, and tools.

54% spend less than 0.5% of their total compensation budget on the ESPP, while 21% spend between 0.5% and 0.9%.

24% report that they do not use any particular way of communicating the plan to their employees. Among those that do use specific communication channels, the most common means are email (93%) and the company website/intranet (90%).

36% of the companies are very satisfied with their ESPPs, and another 36% of them are somewhat satisfied; 25% percent report feeling neutral about their ESPPs; and 3% are dissatisfied with their ESPPs.

That last point is especially interesting. Not surprisingly, the companies that report spending more on participant education tend to also have a higher level of satisfaction with their ESPPs. As the NASPP observes in its summary of the results, companies therefore "might be wise to consider investing more in educating employees about their plans." With features such as those mentioned in the survey, an ESPP can be a really good financial deal for employees.

08 August 2016

The IRS has officially made it easier for employees to elect to pay taxes on restricted stock at grant instead of at vesting, the standard taxable moment. This choice, called a Section 83(b) election, carries both advantages and risks (it is not available for restricted stock units). To make an 83(b) election on restricted stock, an employee must notify the local IRS office about it within 30 days of the grant date. (With the early-exercise stock options used by pre-IPO companies, any 83(b) election must be made within 30 days of the exercise date.)

In July 2015, the IRS and the Treasury proposed an amendment to the regulations under IRC Section 83(b), which we covered in a blog discussion at that time. That proposal ended the requirement to file a copy of a Section 83(b) election with the employee's tax return. Now the IRS simply scans and saves a copy of your original election instead of requiring a second submission with your tax return. In the proposed regs, the IRS allowed taxpayers to rely on the amendment for grants and stock transfers made on or after January 1, 2015.

On July 25, 2016, the IRS issued final regulations that adopt, without changes, the proposed regulations that were issued during July 2015. In a commentary on this development, the law firm Wilson Sonsini Goodrich & Rosati mentions that the official end of this requirement eliminates what was an awkward tax-return-filing burden for employees, especially anyone filing electronically. In addition, a commentary from the law firm Miller & Chevalier points out that the final regulations are helpful for nonresident alien employees of multinational companies who do not have any US-sourced income, as now they no longer have to file a US tax return just to attach a copy of the 83(b) election. Nevertheless, the final regulations warn employees about their continuing responsibility to keep accurate records on the value of the shares for as long as needed, particularly the original cost basis of the stock, as discussed in an article from Nichols Patrick CPE.

18 July 2016

Editor's Note: An update on this legislation appears in our blog commentary of October 20.

Stock options continue to be very popular at startups and other pre-IPO companies, where they are often broadly granted to most or all employees. While these options can have wealth-creating potential, one big challenge is lack of liquidity: employees cannot sell the stock at exercise to pay the exercise price and any taxes owed. As the IRS confirmed in regulations issued during 2014, the tax measurement date (at exercise for options and at vesting for restricted stock) is not delayed by any lack of liquidity or securities law restrictions on resales of stock.

The fact that the tax treatment for stock grants at pre-IPO and large publicly traded companies is identical seems oddly unfair when you consider the vastly differing liquidity situations of private and public companies. Seeking to address this imbalance, recently proposed bipartisan legislation could provide a new optional tax treatment (pun intended) and make stock options more appealing than ever at startups and other pre-IPO companies. Introduced in the House of Representatives and the Senate on July 12, as explained by an article at The Hill, the Empowering Employees Through Stock Ownership Act seeks to give employees in privately held companies extra time to pay taxes on the income they recognize at exercise. The proposed extra time is considerable. Instead of paying taxes at exercise with nonqualified options (or at RSU vesting when settled in stock), this legislation would allow tax deferral for up to seven years.

Senators Mark Warner (D–VA) and Dean Heller (R–NV), members of the Senate Finance Committee, sponsored the bill in the Senate, while Representative Erik Paulsen (R–MN) is the sponsor in the House. In the press release supporting the bill, Sen. Warner states that "extending employee stock programs to a broader universe of workers will strengthen business growth and create new economic opportunities, especially for rank-and-file workers." For his part, Sen. Heller asserts that "it's important to give employees the flexibility to pay their taxes on stock options."

Company And Employee Requirements

To make the new deferral election available (under Section 83 of the Internal Revenue Code), a company would have to issue what the bill calls "Qualified Equity Grants." These grants would need to be made to at least 80% of the company's employees annually. The company would have to provide information or a warning about the tax impact, especially if the share price should decline, and it would be required to report future tax liability on each employee's Form W-2. Qualified grants would be unavailable to major owners, corporate officers, and the highest-paid executives.

Sounding in some ways similar to the procedure for the Section 83(b) election, the deferral election for qualified equity grants would need to be made by employees within 30 days of either when the shares became transferable or when they were no longer subject to a substantial risk of forfeiture, whichever occurred earlier. If the company were to go public or the employee were to sell the shares for cash during the seven-year period, taxes would have to be paid at the time of the liquidity event. The deferral election could also be revoked by the employee at any time, triggering taxes at that point.

Details Still Need To Be Worked Out

Open issues remain. A few questions that occurred to us:

How, exactly, would these grants be structured?

Why is the deferral for seven years?

What information would be required in the election, and how would it be filed?

Would Social Security and Medicare taxes be deferrable as well as income tax?

Nevertheless, this bill is a good way to start a discussion about changing the tax treatment of stock options and restricted stock units in startups and other pre-IPO companies. The approach of this legislation is more understandable than that of the Expanding Employee Ownership Act of 2016, which recently proposed another new type of stock option (covered at the end of a recent commentary elsewhere on this blog).

12 July 2016

A couple of years ago, UBS started a research project called UBS Participant Voice, a series of surveys seeking to canvas the attitudes of stock plan participants toward their equity awards (see our blog commentary on the first survey). The latest survey in the series, which obtained responses from more than 1,000 stock plan participants across a variety of industries, delivers some interesting insights into the value employees both perceive and actually get from equity awards. These insights may be useful both to equity-granting companies and to financial advisors who have clients with stock compensation.

The research starts with a formula, called the UBS Equity Award Value Index, that UBS has engineered to assess employee perceptions of equity awards. The factors going into the index score, which runs from 1 to 100, include the following:

the extent to which equity comp is included in a long-term financial plan

UBS finds that only 9% of its survey respondents place a "high value" on their equity awards (defined as the group scoring between 81 and 100). Just under 50% view their grants as having "considerable" or "moderate" value (a score between 41 and 80). Surprisingly, a whopping 45% of the survey respondents said that they feel their grants have "minimal value" (14%) or "no value" whatsoever (31%).

Clearly, there is much work to be done to raise the perceived value of equity awards among stock plan participants (one of the reasons we started myStockOptions.com 16 years ago). Perceived value matters because, as UBS points out, "each year companies grant more than $110 billion in equity awards, clearly a sizeable expense."

How To Increase Perceived Value

According to the survey findings by UBS, one way to improve employees' perceptions of equity awards may be to encourage practical financial planning with grants. In short, UBS finds that stock plan participants are more likely to perceive high value in their equity awards when they take three steps:

Returning to the UBS Equity Award Value Index, the survey reports that the average score of participants who take none of these steps is only 27 ("minimal value"). Meanwhile, respondents who have taken all three steps have an average score of 55 ("moderate value" in the perception scale), i.e. twice the average of the others. Moreover, almost 80% of those who have taken the three planning steps agreed with the statement "I feel highly confident in achieving my financial goals," but only 36% of the nonplanners did.

In other words, there seems to be a correlation between basic financial planning and perception of grant value. According to UBS, employees view their equity awards more favorably and become financially more confident when they include equity awards in financial planning. By extension, this also implies that stock plan education should include guidance on financial planning for equity awards and how to fit grants into preparations for important life events and goals (e.g. college funding or retirement), as myStockOptions.com does in its sections Financial Planning and Life Events.

Diversification: Proactive Participants View Grants More Favorably

Some of the other findings of interest in the UBS survey involve diversification. Throughout the surveyed employees, the portion of company stock among investable assets averages about 20%. Just over half of the employees have holdings of their companies' stock in excess of the amount they would consider to be the limit of a comfortable level. UBS reports that when employees proactively diversify to avoid overconcentration in the stock of their employer, they tend to value their equity awards more than do employees who diversify for more reactive reasons, such as concerns about the company's stock price. Once again, it seems that there is a correlation between proactive financial planning and favorable perceptions of grant value.

29 June 2016

From myNQDC.com, our other website, comes news affecting nonqualified deferred compensation (NQDC) plans. On June 21, 2016, the IRS issued proposed regulations that modify and clarify various parts of the final regulations on IRC Section 409A and the previous proposed income-inclusion regulations. Although these changes and elucidations may be welcome, they do not alter the cumbersome and complex 409A regulatory framework for NQDC or reduce the onerous taxes and penalties that a participant must pay when the company's NQDC plan is not in compliance, and they concern only very specific situations. The main impact of the proposed regulations is on NQDC plans, but the changes also affect certain situations involving stock options, restricted stock units, and stock appreciation rights.

In the view of experts, these proposals formalize previously informal guidance that the IRS has been providing, offer new flexibility in some areas, and set forth a few new requirements. The IRS is allowing reliance on this guidance now and will not assert any position that runs counter to it.

The proposed regulations present a lengthy list of items. They seek to do the following:

(1) Clarify that the rules under Section 409A apply to nonqualified deferred compensation plans separately and in addition to the rules under Section 457A.

(2) Modify the short-term deferral rule to permit a delay in payments to avoid violating federal securities laws or other applicable laws.

(3) Clarify that a stock right that does not otherwise provide for a deferral of compensation will not be treated as providing for a deferral of compensation solely because the amount payable under the stock right upon an involuntary separation from service for cause, or the occurrence of a condition within the service provider's control, is based on a measure that is less than fair market value.

(4) Modify the definition of the term "eligible issuer of service recipient stock" to provide that it includes a corporation (or other entity) for which a person is reasonably expected to begin, and actually begins, providing services within 12 months after the grant date of a stock right.

(5) Clarify that certain separation pay plans that do not provide for a deferral of compensation may apply to a service provider who had no compensation from the service recipient during the year preceding the year in which a separation from service occurs.

(6) Provide that a plan under which a service provider has a right to payment or reimbursement of reasonable attorneys' fees and other expenses incurred to pursue a bona fide legal claim against the service recipient with respect to the service relationship does not provide for a deferral of compensation.

(7) Modify the rules regarding recurring part-year compensation.

(8) Clarify that a stock purchase treated as a deemed asset sale under Section 338 is not a sale or other disposition of assets for purposes of determining whether a service provider has a separation from service.

(9) Clarify that a service provider who ceases providing services as an employee and begins providing services as an independent contractor is treated as having a separation from service if, at the time of the change in employment status, the level of services reasonably anticipated to be provided after the change would result in a separation from service under the rules applicable to employees.

(10) Provide a rule that is generally applicable to determine when a "payment" has been made for purposes of Section 409A.

(11) Modify the rules applicable to amounts payable following death.

(12) Clarify that the rules for transaction-based compensation apply to stock rights that do not provide for a deferral of compensation and statutory stock options.

(13) Provide that the addition of the death, disability, or unforeseeable emergency of a beneficiary who has become entitled to a payment due to a service provider's death as a potentially earlier or intervening payment event will not violate the prohibition on the acceleration of payments.

(14) Modify the conflict of interest exception to the prohibition on the acceleration of payments to permit the payment of all types of deferred compensation (and not only certain types of foreign earned income) to comply with bona fide foreign ethics or conflicts of interest laws.

(15) Clarify the provision permitting payments upon the termination and liquidation of a plan in connection with bankruptcy.

(16) Clarify other rules permitting payments in connection with the termination and liquidation of a plan.

(17) Provide that a plan may accelerate the time of payment to comply with federal debt collection laws.

(18) Clarify and modify Section 1.409A-4(a)(1)(ii)(B) of the proposed income inclusion regulations regarding the treatment of deferred amounts subject to a substantial risk of forfeiture for purposes of calculating the amount includible in income under Section 409A(a)(1).

(19) Clarify various provisions of the final regulations to recognize that a service provider can be an entity as well as an individual.

Provisions Specific To Stock Plans

Some of the proposals in the regulations listed above directly affect stock plans in a few narrow situations. They include the following.

Stock repurchase rights. The proposed rules clarify that after an involuntary separation for cause (e.g. for a violation of a noncompete) where the company has the right to repurchase underlying shares received from a stock option or SAR exercise or RSU vesting, for less than the fair market value, doing so will not make the stock rights subject to Section 409A.

Pre-employment inducement grants. For stock rights to be exempt, the employee must be working for the company or providing direct services to the company on the date of grant. The proposed rules exempt grants made to someone who is reasonably expected to start work within 12 months and actually does so. This allows grants to employees before actual employment begins. However, the rules for incentive stock options already do not allow those types of options to be granted before employment starts.

Restricted stock for deferred compensation. The proposed regulations clarify that unvested property, such as restricted stock, cannot be used to meet a distribution obligation under a deferred compensation plan. (Previously, it was believed by experts that an employee could elect to receive payment of deferred compensation subject to 409A in either cash or restricted stock without having to meet the subsequent deferral election rules.)

Additional Reading

So far, the most helpful commentaries on the proposed regs that we have seen have come from the following sources:

For background information on IRC Section 409A, how it affects NQDC plans and participants, and the 409A penalties for noncompliance, see the articles and FAQs on 409A at myNQDC.com, which we are in the process of updating for the changes. Meanwhile, at myStockOptions.com, detailed FAQs cover the general impact of 409A on equity compensation and the particular impact on discounted stock options and on restricted stock units that feature deferral of share delivery.

15 June 2016

Here at myStockOptions.com, we keep a healthy world view. In addition to being fun and informative, this is also necessary at a practical level for the upkeep of our Global Tax Guide, which covers the tax treatment of equity awards in almost 40 countries.

Lately we have seen some good news and interesting developments for stock grants outside the United States. Specifically, favorable tax treatment for equity awards is being either extended or proposed in China, Denmark, and Sweden. In addition, there is an intriguing proposal for a new type of stock option right here in the United States.

Deloitte has issued an update memo about equity compensation in China. The tax treatment of grants made by listed companies in China will now also be extended to grants made by certain unlisted high-tech companies. (The memo calls these companies "high-new technology companies," though we think the intended sense is "new high-technology companies.") The new guidance, issued in Circular 116, permits preferential individual income tax treatment for employees at qualified "high-technology enterprises."

Denmark: Taxation Of Equity Awards Becomes More Favorable

On July 1, 2016, the tax treatment of qualified equity awards in Denmark will revert to the tax rules that applied before November 2011, when the tax laws changed. Currently, income from equity awards is taxed as employment income when the recipient acquires the underlying shares. The new tax treatment will shift taxation to the time when the shares are sold. It will also tax the income as capital gain rather than employment income, meaning a lower tax rate for many employees (27% or 42% on capital gains instead of income tax rates, which can be as high as 56%). Among other requirements, to qualify for the new tax treatment the equity award must not be transferable, and its value must not exceed 10% of the employee's annual salary at the time of grant. PricewaterhouseCoopers notes that companies will have special reporting requirements, such as those involving purchase prices and shares, that must be made to Skatteministeriet, the Danish tax authority (see PwC's Recent Legislative Updates, May 2016).

Sweden: Government Explores New Type Of Tax-Qualified Stock Option For Startups

A committee set up by the Swedish government has recommended changes in the taxation of restricted stock and stock options, as explained in an update memo from Deloitte. Under the proposal for restricted stock, a grant with a sale restriction of two years or less would be taxed on the value at grant, not at vesting. Restricted stock grants with a sale restriction of more than two years, or with any type of forfeiture risk (even less than two years), would continue to be taxed on the value at vesting. The committee also recommended the introduction of a special tax-qualified stock option for small startup companies in which no tax would apply to the income at exercise. Instead, the optionholder would pay just capital gains tax upon the sale of the shares, at a rate of 25% or 30% instead of the employment income rate, which can be as high as 55%. This tax-qualified stock option would be available only to companies that employ no more than 50 people, bring in net annual sales of SEK 80 million or less, and have been in business for no more than seven years. Large tech companies in Sweden are urging the government to provide similar tax treatment for their option grants, as reported by Bloomberg last month.

United States: New Type Of Stock Grant Proposed

Under a new president next year and perhaps a new majority party in the House or the Senate, new types of tax-preferred equity compensation may be considered (along with potential tax restrictions on the current types).

The Expanding Employee Ownership Act of 2016 (HR 4577) is currently being mulled by the House Ways and Means Committee. By the standards of tax legislation, the full text of the bill is brief (8 pages), though it is no easier to understand than the typical legislative tract. As we read it, the proposed bill would introduce a new type of stock option in which employer securities received as compensation for services would be excluded from the employee's gross income if the stock were held for at least ten years. If the shares were held for more than five years but less than ten years, it appears that the the value of the shares received would still not be taxed but that the capital gains would be. The bill's co-sponsors are Rep. Dana Rohrabacher (R–CA) and Rep. Collin Peterson (D–MN). Rep. Rohrabacher, who was a speechwriter for Ronald Reagan during the 1980s, wrote in The Washington Times on May 26 that his motives for proposed this new type of stock option include its potential as a "way for employers to get more stock into the hands of employees and ensure they hold their shares."

06 June 2016

Here's a fun piece of trivia. Way back, before myStockOptions.com, our publishing team first became involved with stock plan education while producing our Think Twice video series for employee education to prevent insider trading. Since its launch, myStockOptions.com has always had a special section of content on insider trading and other topics in SEC law, including Rule 144, Section 16, and Rule 10b5-1 trading plans. To this day, whenever we hear about new insider-trading cases that provide excellent cautionary tales for employees, executives, and directors, we like to bring them to your attention.

Highly educational insider-trading cases often involve famous people and intriguing circumstances. These qualities are notably present in a recent high-profile SEC action involving three people: professional golfer Phil Mickelson; William "Billy" Walters, a prominent sports gambler in Las Vegas; and Thomas Davis, a director on the board of Dean Foods. In addition to the SEC press release on the case, the related public statement from Andrew Ceresney, the director of the SEC's Division of Enforcement, is worth distributing in its entirety to your board members. Mr. Ceresney's message is clear:

"Board members owe their shareholders a fiduciary duty and we will pursue vigorously those who breach that trust and seek to profit from those breaches. The management and shareholders of Dean Foods placed their trust and confidence in Davis, and he repeatedly breached that trust and confidence, year after year, providing Walters with the company's most closely held information."

The SEC brought criminal charges against Mr. Davis, who has already pleaded guilty.

Some commentators think that the outcome with Mr. Mickelson, who was not charged with securities fraud, indicates that challenges may be growing for the SEC in bringing cases against tippees after United States v. Newman (see a blog commentary from the law firm Brooks, Pierce, McLendon, Humphrey & Leonard). Clarification on what is needed to show tippee liability is expected when the Supreme Court issues its opinion in Salman v. United States.

However, the case involving Phil Mickelson also shows that when the SEC finds insider trading somewhere in a chain of events, all who profited will be forced to pay back their gains, even if they did not know that the information in question was tainted. In the SEC's action, Mr. Mickelson was named as a "relief defendant," i.e an individual who must turn over ill-gotten gains arising from schemes perpetrated by others. Without admitting or denying the allegations in the SEC's complaint, Mr. Mickelson agreed to pay the full disgorgement of his trading profits, which totaled $931,738.12 plus interest of $105,291.69.

31 May 2016

We like it when companies make broad-based grants of equity awards to all of their employees. These moves show that stock compensation and share ownership are not just for executives and directors but are also practical, commonsense ways in which companies can reward rank-and-file employees above and beyond salary and encourage a commitment to workplace excellence through a culture of employee ownership. From an economic perspective, the wealth that middle-class employees can create through grants of stock options and restricted stock/RSUs has the potential to reduce income inequality.

Unfortunately, many employees and managers saw a significant reduction in their equity compensation after stock option expensing became mandatory during the last decade. This is why we are especially pleased by the new generation of broad-based grants that we have observed. In perhaps the most famous example, last year Apple declared its intention to issue RSUs to all of its employees, as reported by an article at the tech-news website 9to5.

Now Chobani, a popular yogurt-maker, has announced that all 2,000 of its employees will receive shares worth 10% of the company when Chobani eventually goes public or is sold. This move was both reported and praised by several high-profile media outlets, including The New York Times and NPR. The Times estimates that if Chobani were to be valued at $3 billion in an IPO or acquisition, the average employee stake in the company could be worth $150,000—and some long-tenured employees could have stock worth more than $1 million.

Chobani's gesture is very good news to Professor Joseph Blasi of Rutgers University. A long-time advocate of employee ownership, he has extensively researched this topic and recently co-authored a book called The Citizen's Share: Reducing Inequality in the 21st Century. In an article for The Huffington Post, he states that Chobani's push to award equity for all workers may be part of a new trend in employee ownership. "When you taste that next teaspoon of Chobani," he writes, "you may be tasting a new corporate ideology of shared capitalism, inclusive prosperity, and profit sharing." As he puts it, this broad-based grant is "a promise that any future Chobani shareholders will not simply be those who play the stock exchanges but will also include those workers who help create the broad wealth that stock markets are supposed to be all about." He then asks whether "middle class capital shares" of this type are a possible alternative to tax redistribution that could help to counteract the recent stagnation of wages among the middle class in the United States.

Another private company encouraging broad-based employee stock ownership is Zingerman's, a mail-order purveyor of gourmet food that has grown out of a popular deli and restaurant in Ann Arbor, Michigan. Valued at $60 million, Zingerman's has given employees the opportunity to buy stock at $1,000 per share and is offering to help them finance purchases, according to an article at Forbes.com. More than 200 employees have elected to buy stock. Ari Weinzweig, a co-founder of the company, observes that this initiative is "allowing people who don't have the cash, but who have the emotional and intellectual interest and engagement and want to commit to it, to do it." (For more about this program and other topics, listen to an interview with Mr. Weinzweig at the website of WBUR, a radio station in Boston.)

This trend toward broad-based grants reminds us a little of the optimistic, positivity-charged culture of employee ownership in which stock options first thrived during the 1990s. In fact, we started myStockOptions with the primary goal of providing stock plan education for these employees. As we recently wrote in a retrospective piece, the 1990s "democratized stock options, bringing them down from the lofty heights of Mt. Executive into the workaday foothills of middle-class people who in an earlier era might never have heard of them." As the examples above show, stock compensation continues to have the potential to improve the financial wellbeing of anyone, not just those at the top. All you need are the right equity incentives and some honest, hard work.

11 May 2016

Millennials, people born between the early 1980s and the late 1990s, now form the largest generation in the United States. According to a commentary from the Pew Research Center, which theorizes that the oldest Millennial was born in 1981 and the youngest in 1997, Millennials "have surpassed Baby Boomers as the nation's largest living generation." Citing estimates of population from the US Census Bureau, the Pew Research Center states that there are now more than 75 million Millennials in the US—with the addition of Millennial-aged immigrants, that number is projected to reach about 81 million in 2036. Other sources claim the number of Millennials in the US has already swelled beyond 80 million.

Some experts estimate that the workforce in the US is already about 50% Millennial. You, the reader of this blog, are probably a Millennial. For several years, countless talking points have discussed how workplace culture has had to adapt to the vast influx of multi-tasking, online-chattering, shrewdly ambitious Millennials—often said to have famously short attention spans, but equally often praised for rejuvenating companies with smart new ideas and insights about creating excellence in the digital age.

Here at myStockOptions.com, the talking point that most concerns us is, naturally, the issue of stock compensation for Millennials and the related stock plan education and communications. As we all know, stock plans work well to attract and retain talent only if participants understand their grants, making education and communications essential. Given the differences between the Millennial mindset and that of the Baby Boomers and Generation Xers who entered the workforce before them, how should stock plan education adjust to ensure that Millennials are getting its messages?

We have a few answers. A few weeks ago, at the annual conference of the Global Equity Organization (GEO) in Boston (our hometown), myStockOptions editor-in-chief Bruce Brumberg took part in a panel session entitled Millennials: Investment Attitudes, Behavior, and Education Strategies for Equity. His four fellow panelists were Nooper Iyur, the senior manager of global equity admin and payroll at Akamai Technologies; Jean-Michel Robiou, a stock comp analyst at Google; Renee Trotta, a senior manager at Charles Schwab; and a director of shareholder services at a privately held company who did not want to be named.

The session featured case studies from Akamai, Google, and the (unnamed) private company of the fourth panelist.

Akamai reports that 54% of its employees are of the Millennial generation. Amongs its various equity plans, the company boasts and enviable 90% ESPP participation rate among its US workforce. What guidance does Akamai have for communicating stock plans to time-strapped Millennials?

Develop relevant content that engages your employees. For Akamai, this means conducting equity surveys, creating newsletters, asking a question in each educational session or webcast, and even prize raffles.

Make your documents an easy, quick read.

The workforce at Google is also 54% Millennial. The company's equity awards consist solely of RSUs. Here are some of the tips Google has for tailoring stock plan education and communications to Millennial employees:

Understand their priorities.

Focus on the basics. Consider that employees value what they understand. "Participants won't be motivated by complexity," noted Google's representative on the panel.

Use email to communicate, not traditional media. ("Embrace the magic of Harry Potter and drive engagement.")

In a vast company, win trust by being the familiar "voice and face of your education initiatives" in the various corporate villages where employees spend most of their working lives.

The private company that presented in the session offers equity plans that include grants of restricted stock units and performance share units. Its techniques for engaging employees include the following:

One-day, all-day educational sessions for employees a month after they start. These have been popular: the company says each live session has had "standing room only."

The use of live, internet-based, and intranet-based sessions has helped employees take part amid their busy workloads.

Flexibility about educational tactics. The company reports that some employees want "hand-holding" with information about their equity awards, and it is willing to do that.

Brevity wins engagement. The company keeps its stock plan communications short—indeed, the company says that for its Millennial employees, "communications need to be short so they read them."

In his portion of the session, our editor-in-chief Bruce Brumberg colorfully provided a review of fundamentals for stock plan education, whether for Millennials or others. In his view, topics companies should examine include:

mechanics, including account setup

core broker and IRS forms

exercise methods

tax-withholding elections

enrollment procedures

goals for the plan, and why it is a special benefit

core tax rules and reporting forms

For a young employee population that is continually busy and multi-tasking, Bruce emphasized the need for timing education to occur during "teachable moments." These moments may include hire, tax season, the year-end period (especially if your company’s stock price has increased), vesting, and ESPP enrollment.

Interactive content is key, Bruce observed, and it is important to have graphics, not just text. Engaging content may include quizzes and videos—and, of course, everything needs to be accessible by mobile phones. However, at the same time, Bruce sought to debunk the common assumption that Millennials are unwilling to read. As he explained, "myStockOptions has found that when a topic really interests them, Millennials can be hungry for knowledge and in-depth information." While messages for Millennials must be tailored to accommodate their busy, frequently online lives, these communications should not be so short that valuable details are lost.

That is a theme we adhere to in our own content at myStockOptions.com. While we have branched out into videos, podcasts, quizzes, and even a glossary app for mobile devices, we maintain a clear, engaging, detailed array of articles and FAQs that deliver information about stock compensation for anyone who wants to dig deeper (and, as Bruce said, we find that many people do). Companies that license our content can choose any or all of these approaches to stock plan education and communications.